Will forcing Connecticut’s wealthy to pay their fair share persuade them to leave Connecticut?

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RAISE TAXES – THE RICH WILL MOVE…

It’s an argument we’ve heard in Connecticut a number of times.

 

Just last year, State Representative Lile Gibbons, the Greenwich Republican whose district includes the Greenwich homes with waterfront views, warned that if the legislature increased the estate tax “People just aren’t going to stay” in Connecticut.  Over the years many other Republican elected officials, including Jodi Rell, and business organizations have said the same thing.

Their argument is that if Connecticut raises the income tax or the estate tax on the wealthy the result will be that many wealthy taxpayers will simply shift their tax homes to locations with lower taxes.

Connecticut Republicans are not alone in making these dire predictions.  Conservative commentators are constantly making similar claims.  At the end of December 2010, an editorial in the venerable Wall Street Journal once again opined that the direct result of higher taxes on the wealthy is that many of them decide to sell their homes, leave their communities and flee to lower tax jurisdictions.

The editors of the WSJ used a recent report in the state of Oregon to back their claim, In 2009 Oregon, with a majority vote of its state legislature and the approval of its voters in a state-wide referendum dramatically increased its state income tax.  The rate for those making more than $500,000 was raised to 11% and the rate on those making $250,000 to $500,000 increased to increase to 10.8%.

A year later, when a report was released that Oregon has collected less revenue than projected, the WSJ wrote that Oregon’s wealthy had “fled the state”. 

But wait, it turns out that nothing of the sort occurred.  Rather than a wholesale dash for the border, the number of tax returns filed in Oregon actually went up.  That said, as a result of the deep recession that is dragging down the country, it turns out that a number of Oregon’s wealthiest taxpayers where no longer as wealthy as they once were and thus fell below the new “soak the rich” income tax rates.  

The “if you tax them, they will flee” myth was further busted in 2010, when a major international financial firm that tracks the marketing behavior of millionaires released their most recent report.  According to Phoenix Affluent Market’s data, the overall number of households making more than a million dollars actually increased by about 8% to 5.6 million.

The report, which measures the number of millionaires per capita in every state, discovered that “two of the states with the “highest marginal income-tax rates” also had the highest number of millionaires per capita.” 

The author of “The Wealth Report”, Robert Frank, who writes for the news division of the Wall Street Journal (rather than the editorial department), wrote “Hawaii, with the greatest number of per capita millionaires levies an 11% tax rate on those earning $200,000 or more.  Maryland, the state with the 2nd greatest number of millionaires targets its wealthy with a special millionaire’s tax rate of 6.25% and New Jersey, the state with the 3rd largest number of millionaires has a rate of 10.75% on those households earning more than $1 million a year.

Frank went on to “This isn’t to say that taxes don’t matter to the wealthy. They do. A lot.” But he also noted that “some states with very low marginal income tax rates, such as Connecticut and Alaska, also ranked high on the density list.”

To explain the apparent paradox that many wealthy people live in higher tax jurisdictions, Frank’s piece quotes the Managing Director of the Phoenix based consulting firm that released that study.  According to them, “…Hawaii, Maryland, New Jersey, and Connecticut all share some important distinctions: they are small states with large concentrations of highly educated professionals and business owners, which are key ingredients to growing wealth…in general, most high-net-worth households don’t base their living decision on tax rates, but on things like quality of life, access to good education, infrastructure and culture.”

Connecticut’s wealthiest citizens presently pay a 6.5% income tax, far below what they would pay if they moved to New York or New Jersey (not to mention if they decided to live in New York City.  Even if Connecticut raised its income tax on those making more than a million dollars by a whopping 50%, the rate paid would increase to a point where it is on par with the other jurisdictions in the tri-state region.

To suggest that if we increase taxes on the wealthy they will flee is not only not true, but intellectually dishonest.  Even studies produced by our own state government reveal the truth.  In 2007 the Connecticut General Assembly examined out-migration.  While it found that the “largest number of individuals leaving Connecticut — 27,773 — moved to Florida” it also revealed that those who moved into Connecticut during the same period “had, on average, higher incomes” and “second-favorite destination for residents leaving the state was North Carolina, which has an estate tax and an income tax”  that is on par with Connecticut.

Oh and what are the state’s with the highest number of millionaires? Hawaii with 6.93%, Maryland 6.79%, New Jersey 6.69%, Connecticut 6.65%, Massachusetts 5.98%, Alaska 5.97%, Virginia 5.94%, New Hampshire 5.79%, California 5.66% and Washington, D.C. with 5.53%

For more information on this issue check out the following sources:

 Wall Street Journal:   http://online.wsj.com/article/SB10001424052748704034804576026233823935442.html

WSJ’s Robert Frank; http://blogs.wsj.com/wealth/2010/09/28/high-tax-states-still-grow-millionaires/,

 Citizens for Tax Justice: http://www.ctj.org/taxjusticedigest/archive/2011/01/more_on_the_journals_bogus_ore.php

 And: http://www.phoenixmi.com/images/uploads/pdf_upload/StateRankingsMillionaires20062010.pdf, http://www.offthechartsblog.org/many-wealthy-moving-down-not-out/

  • Richard

    Nearly all the studies agree to varying degrees: higher wealth taxes and Capital Gains taxes contribute to a less friendly environment for business and the wealthy.

    We know there’s migration to the New South. It isn’t an exodus and isn’t likely there will be one with higher taxes. As long as Fairfield County is a bedroom NYC community for the Hedge Fund set there will be monied interest here.

    The better question: how will higher taxes create more jobs and create a robust CT economy. By increasing pension fund contributions? By simply balancing the present budget deficit CT will become the New Economy mecca overnight?

    In many ways the question isn’t so much “what tax rate?” as “what are we doing wrong with the the money to get so little back?”

    A high tax state like CT has yet to prove it can compete with lower tax New South states and Texas for job growth. The emptying of the Rust Belt ought to scare CT into doing something besides emulating Rust Belt taxing and spending models..

    And to the North? Mass has its Health Care, it’s high tech beltway around Boston, it’s Harvard and MIT and Boston College and with a lower tax base than CT. Better for startups and Venture Capital and Fastest Growing Companies too.

    • jonpelto

      Richard, those arre fair questions…. Will add some thoughts and hopefully others will too.

  • SJ

    More in the line of what Richard said about getting so little back. It’s been said before, and it remains true that CT has a spending problem perhaps much more so than it has a revenue problem…

    • jonpelto

      SJ (and Richard)…. I think there are a variety of different questions – the level of taxation (and then who pays the taxes). I’ll dig up the exact numbers but middle income families pay about 10% of the income in state and local taxes in Connecticut while wealthy families pay less than 6% of the income in state and local taxes. Even if we decide not to have a progressive tax system, the least we can do is re-balance so middle income families pay their fair share while wealthier families pay theirs.

      As to the issue of “so little back”, i’m curious about what you mean by that. Are there specific programs that you feel we aren’t getting our money’s worth. That is not to say we shouldn’t puch for a more effecient and effective government, but as California is now facing and we will have to face soon – what public services do you think can be reduiced or eliminated?

  • unionleo

    The whole issue has less to do with taxing wealth as it has to do with a fair, balanced and equitable tax structure. The dialogue has been coopted by those with the best deal. In CT the lowest income bracket has about a 12% commitment in taxes – all local and state combined. The highest income bracket has an effective net around 4.8% as far as their total contribution to the cause. That’s just way out of balance.
    Because we don’t wrestle with the structure regressivity has creeped into property taxes. Progressivity has been lost in the income tax. Many sales and use taxes and exemptions have become nonsensical. Our business tax structure is just plain stupid and unworkable.
    We have not attempted to make the structure work better since 1991 and the deal back then created as many problems as it solved.
    If we can de-politicize the rhetoric and actually look at real numbers, real issues, collection data and effectiveness we probably could come up with a structure that works much better – makes sense and takes uncertainty and budget spikes out of reactionary public policy decisions. And we can’t wait to rebalance every 20 years.
    If we do this, we’ll even give the wealthy yet another reason to stay..

    • jonpelto

      excellent points leo – thanks for posting

  • Richard

    Rejiggering the tax code by a couple percentage points among brackets doesn’t make CT the job growth capital of the US or improve the quality of life. I’ll let that side of the equation go for a bit.

    Anyone who’s looked at the CT budget knows where the meat of the budget is at: Health Care, Education, and Pensions.There are some good solutions for holding down costs in each field.

    SustiNet, as proposed, isn’t one of them. Cost containment needs tort reform, a publicly contracted preventive care system similar to the HMO model with centralized visibility into the purchasing and utilization, etc. The Decentralized Medical Homes alternative will be a cost disaster. Adopt the MASS exchange model. It works better than any CT proposal. Remove Health Care from the Comptroller and put it in the hands of professionals interested in both expanding coverage and cost-containment. Fully finance medical educations in the state in return for public service after graduation (or finance training while working). Flood the market with Medical Employees to lower wages and create a workforce that is export ready to other states after performing their service, etc., .

    The spiraling costs of the 4-year State Colleges needs to be checked. They need refocus and trimming down to employable skill sets delivered at lower than average cost. The flagship, UConn, is a different model of excellence as a Research U.

    Pensions? I’d break the past agreements on a means tested basis..

    The traditional CT solution is to throw more money at these problems without making major structural changes.

    CT should pay a premium for companies with export jobs to China and CT/Chinese partnerships and lead the nation in that area. Partner with Chinese Education, etc..Rename the state “Little China”. Anything necessary to capture the economic boom of the next 50 years. That’s worth sacrificing for. $125,000 pensions for public employees?. Nope. Not worth sacrificing for. Favorable Tax status to fastest growing companies, Expand the CT Innovation Model, etc. Refocus education.

  • Richard

    C;mon. Needs-based Pension Benefits.

    That had to make you laugh. When have Democrats ever rejected a needs-based progressive system before? Oh! State and Municipal Pensions!

    Hell will freeze over right?

    • jonpelto

      Richard, I’ll respond as soon as I can – do remember that the Tier I pension system stopped in 1985 (the last of the tier 1 people are retiring now). Then came Teir 2 and then Tier 2A. Putting side the legality of changing the sytem for people who have already retired (probably not possible but there is a case – I think Wisconson) that is making its way to the Supreme Court on the subject — take a look at Tier 2A and tell us what you DON’T like about that… (the health care piece is separate from the pension and I think that is where savings can occur, assuming we are talking about people yet to retire).

  • ed krumeich

    One study frequently cited as proof of migration related to estate taxes was done in 2004 by Professors Jon Bakija of Williams College and Joel Slemrod of University of Michigan Business School. This study, which found evidence of some outmigration from estate taxes, concluded that the revenue lost from outmigration was small in comparison to the revenues gained from having a state estate tax in place. Another study in 2006 by Professors Karen Conway of the University of New Hampshire and Jonathan Rork of Vasser College concluded:”our research casts doubt on the view that the elderly react to state…[estate, inheritance and gift] tax policies in making their migration decisions.” In response our Greenwich legislators fall back on anecdotal accounts from wealthy constituents that they will flee the state for more tax friendly climes unless their taxes are lowered or abolished .This is bedrock belief in the modern Republican ideology, along with the equally shaky assertion that Connecticut is the most highly taxed state in the nation.

  • ed krumeich

    I should have credited a research paper, published by the Center on Budget and Policy Priorities on January 9, 2007, by Elizabeth McNichol, entitled “Research Findings Cast Doubt on Argument that Estate Taxes Harm State Economies,” which summarized both studies.

    • jonpelto

      Ed, thanks so much for posting this important information. I hope the Governor, OPM and the legislators take the time to review these studies

  • Richard

    You may also want to reference the following study from CT OPM which discusses CT’s Estate Tax specifically and includes the results of a survey.

    http://www.ct.gov/drs/lib/drs/research/estatetaxstudy/estatetaxstudyfinalreport.pdf

    If CT was to raise its estate tax to 50% and had zero out migration it would raise in the neighborhood of another $500 million dollars in this economy and $800 million in a good economy.

    Over half of CTs taxable estates fall into the $2 to $3 million range. If you were to tax a $2.5 million estate at 50% and paid $400,000 to each of the 3 kids would that make the state employee’s union efficient? Would that better government? Would that get us a well run Health Care program?

    No. We would be stuck with the same problems in State Governance. The same job growth or less. And likely we would in fact see much more out migration of wealth. Talk to some of our British Tax Exiles who have been here 30 years if CTs capable of finding an estate tax rate that will get them to relocate their domiciles.

    .The surveys say it’s happening now and will likely continue. The Estate tax isn’t sufficient by itself.

    BTW there are no yachts registered in Delaware or corporations registered in Delaware. The rich never avoid taxes.

    Raise taxes with impunity and test that theory..

    • jonpelto

      Thanks Richard, thanks for adding the link to this study. Off to explore it.

  • ed krumeich

    The OPM study is interesting, although it reports disparate data without correlating the data with any conclusions (which, I suppose, is the role of the OPM) and leaves the legislators to cherry pick conclusions. Estate planning is based on the avoidance of estate taxes. Keep in mind that a married couple may shield $ 4 million in assets from estate taxes by rudimentary estate planning (i.e. the first estate distributes $ 2 million to heirs and the balance to surviving spouse; up to $ 2 million may be passed on the second estate before tax kicks in). Very few estates are subject to the estate tax; merely looking at “taxable estates” prevents a false picture of how many persons are affected. To me, the issue is one of priority; is the money better spent on education, the environment etc. or increasing the windfall to heirs of multimillion estates. There are some who relocate to other states to avoid taxes, but the income tax and property taxes are a direst cost on the tax payer not the estate tax. Others only pretend to move to their vacation homes. If someone seeks to cheat the system by residing here and falsely claiming another state as domicile, like people did when they registered Connecticut birthed boats in Delaware, it creates a problem in enforcement.

    • jonpelto

      Thanks Ed for this information